The market sell-off is likely to continue and could get worse before it gets better, Wall Street veteran Jim Paulsen told CNBC.
The chief investment strategist at The Leuthold Group said the stock market is torn between dueling issues: continuing concerns that the economy is overheating and now what he calls a "stagflation mindset." Stagflation has been defined as a rare economic phenomenon of inflation, a drop in business activity, and a rise in unemployment.
"What we got is escalating fears of recession, but at the same time we're still dealing with overheat pressures," Paulsen said Wednesday on "Closing Bell." "And I think we're going to have to kill off concerns about inflation, and that probably means a deeper correction and even weaker economic growth before this bull can continue."
Investors sold stocks Wednesday after the Fed approved a quarter-point rise interest rate hike. The major indexes all closed at their lows for the year. The sell-off continued Thursday as equities were down midmorning, with the Dow off more than 100 points.
Last month Paulsen said that investors would be more pessimistic about a recession when the stock market reaches a bottom.
A CNBC Fed Survey this month illustrated that economists, fund managers and strategists are growing more worried about economic growth and that a recession could come next year. Chief financial officers are gradually picking up on those fears as well.
"I think the central problem is not that we've had overheat issues, we've had those all year ... [and] we had a good economy to offset them," Paulsen said. "This is the first time in the recovery that we have had worries, in my view, about [stagflation] ... and when you have a stagflation mindset in the stock market, it's a tough path for the bull."